Elasticity and expenditure

Indian Economy glossary

Also called: Total expenditure method · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"

Meaning

Price elasticity decides what happens to a buyer's total spending, P × Q, when the price changes. Checking the direction of spending is called the total expenditure method.

  • Elastic demand (|eD| > 1): price and spending move in opposite directions.
  • Inelastic demand (|eD| < 1): price and spending move in the same direction.
  • Unitary elastic demand (|eD| = 1): spending does not change.

For small price changes, the change in spending is roughly ΔE ≈ Δp · q(1 + eD).

Example

Suppose the price rises by 10% and the quantity falls by 8%. Spending rises, so demand is inelastic. If the quantity instead falls by 12%, spending falls, so demand is elastic. If a 4% price cut raises spending by 2%, demand must be elastic.

Don't confuse with

  • Supply-side revenue: this logic is about the buyer's spending when price moves along a demand curve. It is not about changes in supply.

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